The recent experiences of the Ukraine demonstrates, quite amply, that there isn't a mining company in the world with the power to exert countervailing influence on the Russian state; with the movement of the Russian state against foreign control of strategic deposits, which is essentially interpreted as anything of substantial value (e.g., large gold and copper deposits; any PGM, nickel, uranium or rare earth deposits), it would take a brave, brash or brazen investor to face the risks of a major investment in this part of the world. There are examples of success, of course, but any investor will find that managing relations with the Russian state is a large part of the annual work program.

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Russia, officially known as the Russian Federation, is the world’s largest country, sharing borders with: North Korea, China, Mongolia, Kazakhstan, Azerbaijan and Georgia to the south; Ukraine, Belarus, Latvia, Finland and Norway to the west and southwest; and the Arctic and Pacific Oceans to the north and east.

The vastness of the country results in a highly varied climate and terrain. The majority of Russia has a subarctic climate, marked by incredibly harsh winters, where temperatures may fall below -50°C. In the southwest part of the country the climate becomes more humid, with warm hot summers and, winters which, whilst still cold, are nothing compared to the temperatures experienced in the north. The west of Russia is mainly covered by broad, low plains, low hills and vast plateaus, whilst in the east the terrain is mainly mountainous. Endangered species in the country are numerous and include the Amur Tiger (Siberian Tiger), Amur Leopard, the Snow Leopard, the Russian Desman and the Oriental Stork. Spruce, Pine, Fir and Cedar are amongst notable tree species, whilst chamomile is the country’s national flower.

Serious environmental disasters have taken place in Russia (and the former USSR), reflecting an historic priority of industry over the environment. While Russia has adopted modern technology in large parts of its resource sector, it continues to lag behind Western countries in the management of environmental matters. Current environmental issues in Russia include deforestation, air pollution, water pollution, soil contamination, soil erosion, poaching and loss of habitat. The cost of rectifying such problems is virtually unquantifiable. In recent years Russia has evidenced an interest in re-militarising, as well as concentrating and consolidating power, which is likely to stall any advance on environmental issues.

PRINCIPAL LEGISLATION AND REGULATOR

The Constitution of the Russian Federation provides that “every citizen has [the] right to [a] favorable environment, true information on the state of [the] environment and compensation for damage to health or property caused by [a] breach to environmental legislation” (Art. 42). In addition, Article 58 of the Constitution obliges every citizen to protect the environment. The key piece of environmental law is the Federal Law No.7-FZ “On Environmental Protection” dated January 10, 2002 (Environmental Protection Law), which includes the principle of polluter pay and addresses the environmental impact assessment (EIA) process.

The Ministry of Natural Resources and Environment (MNR) is responsible for environmental protection and natural resources, including the right to issue environmental permits. Regulations specific to environmental permitting and the EIA process include the Federal Law No.174-FZ “On Environmental Expert Review” (Environmental Expert Review Law), dated November 23, 1995 and the MNR’s Regulations No.698 “On State Environmental Expertise”, dated June 11, 1996 (SEE Regulations). The assessment procedure of the environmental impact is regulated by the Environmental Protection Law and the Environmental Expert Review Law and Regulations No. 372 “On the Assessment of Environmental Impacts”, dated May 16, 2000 (OVOS Regulations).

The EIA process is required prior to the implementation of a project that may have impact on the environment, and is regulated by the Environmental Protection Law (Art.32 and 33), the Environmental Expert Review Law (Chapter III) and the OVOS Regulations. The process itself involves a procedure for identifying likely environmental impacts, consulting with concerned parties and balancing environmental impacts against social and economic considerations. The EIA must be performed before the SEE (Art. 2.2, OVOS Regulations). The OVOS Regulations require the developer to prepare an environmental impact statement (EIS) and require a consultation and public participation process (see Part IV, OVOS Regulations). The OVOS Regulations detail the process for submitting the draft (and final) EIS to the competent authority within the project development cycle and provide a list of the information which is to be supplied with respect to the EIS.

Pursuant to the Environmental Protection Law, the Environmental Expert Review Law and the SEE regulations all developers are required to submit a project plan and documentation to the Federal or Regional SEE Departments (SEEDs). The SEE process must be carried out at both federal and regional levels for certain types of projects listed in Articles 11 and 12 of the Environmental Expert Review Law. SEEDs may retain experts in order to assist in analysis, the cost of which is borne by the Federal Service for Environmental Control or its regional offices or in accordance with the Russian laws (Art. 16, Environmental Expert Review Law). The outcome of the SEE process is the so-called ‘SEE Resolution’ (Art.18, Environmental Expert Review Law), which may be positive or negative. A positive SEE Resolution from the relevant SEE Department is an essential precondition for implementing any project that may have an impact on the environment (Art.46, Environmental Protection Law).

An environmental permit can be issued once the foregoing processes have been completed. The environmental permit will outline the acceptable emissions permitted. Permits are usually issued for one year and can be extended (Art.1.1,Administrative Regulations No.650 of Federal Service for Environmental Control regulating the issuance of the environmental permits, dated July 25, 2011).

Russia, officially known as the Russian Federation, is located in northern Eurasia and bordered by numerous countries including: North Korea, China, Mongolia, Kazakhstan, Azerbaijan, Georgia, Ukraine, Belarus, Latvia, Finland and Norway. The country has the 14th largest economy in the world by nominal GDP. Besides the mining and extractives industry, which contributes significantly to the Russian economy, other important industries include: machinery building (e.g. ships, aircrafts, military equipment etc.); transportation equipment; manufacturing; and construction.

Russia is ranked among the world’s leading mineral producers, particularly in relation to nickel, platinum, palladium, potash, coal, iron ore, copper, bauxite, aluminum, gold and diamonds, and is a major producer of several other base and industrial minerals. The Russian economy benefits significantly from its natural resources, with the total value of output from mining and quarrying accounting for 14.6% of GDP in 2013 (USGS). According to the World Bank, Russian ranks 13th in the world in terms of subsoil wealth and figures from 2013 show that the total value of Russian mineral exports was over $3.5 billion (over 70% of exportation income). Russia holds the world’s largest recoverable coal reserves and accounts for over 10% of global production of nickel, iron ore and potash production.

In the 2015 Policy Perceptions Index, published by the Fraser Institute, the country ranked in 75th place out of the 109 jurisdictions included in the survey. Transparency International’s Corruption Perception Index awarded the country a score of just 29, placing it in 119th place of the 168 countries analysed.

PRINCIPAL LEGISLATION AND REGULATOR

In Russia, minerals are reserved for the benefit of the people inhabiting its respective territories (Art. 9 of the Constitution of the Russian Federation (dated December 12, 1992); Art. 3 of the Land Code; Art. 1.2 of the Subsoil Law). The primary state authorities regulating the minerals sector in Russia are: the Government of the Russian Federation, the Federal Ministry of Natural Resources and Environment, and the Federal Agency for Subsoil Use (Rosnedra). The Minister of Natural Resources and Environment reports to the President of the Russian Federation and the Russian Government. Rosnedra is headed by the Deputy Minister of Mineral Resources and Environment, who reports to the Minister of Natural Resources and Environment. Aside from the Constitution, the primary Russian legislation regulating the minerals sector are the: Federal Law No. 2395-1 “On Subsoil” dated February 21, 1992, as amended (Subsoil Law); The Procedure for Subsoil Use Licensing, adopted by Resolution No. 3314-1 of the Supreme Soviet of the Russian Federation dated July 15, 1992, as amended (Licensing Regulation); The Land Code of the Russian Federation (Federal Law No.136-FZ) dated October 25, 2001 (Land Code); and the Federal Law No. 41-FZ “On Precious Metals and Precious Stones” dated March 26, 1998, as amended (Precious Metals Law). Other relevant laws include Federal Law No. 57-FZ “On Procedures for Foreign Investments in Companies of Strategic Importance for National Defense and Security of the Russian Federation” dated April 29, 2008, as amended (Strategic Investments Law); and Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” dated July 9, 1999, as amended (Foreign Investments Law).

GRANT AND FORMS OF MINERAL TITLE

Mining operations requires a Subsoil License as well as surface rights. Subsoil Licenses are awarded by tender or auction conducted by Rosnedra: when tendered, the participant that submits the most technically competent, financially attractive and environmentally sound proposal is awarded the license; when auctioned, the participant that offers the highest price is awarded the license (Art.10, Licensing Regulation; Art.13.1, Subsoil Law). The competitive system (tender vs. auction) is generally determined by the relevant regional authority, but an auction may not be used for radioactive minerals and notably only Russian state companies may participate in the tender process related to such minerals (Art. 10.6 of the Licensing Regulation). In addition, since January 2013, only auctions may be used for Deposits of Federal Importance. A Subsoil License granted under the Subsoil Law is accompanied by a licensing agreement between the relevant state authorities and the licensee (Art.11, Subsoil Law). Subsoil Licenses become effective upon their registration with Rosnedra. The licensing agreement sets forth the terms and conditions for the use of the license subsoil area. The three major types of Subsoil Licenses are:

- Exploration License (EL) – is awarded by a special commission formed by Rosnedra, which includes representatives of certain local authorities. An EL gives the holder a non-exclusive right of geological exploration and assessment within the license area. An EL is usually granted for a period of five years (except where located in certain remote regions where seven years is possible) (Art. 10 of Subsoil Law). In limited circumstances, an EL gives the holder a right to obtain a PL in a simplified procedure (without any tender or auction) upon discovery of deposits (unless such deposits are of “strategic reserves” pursuant to Art.2.1 of the Subsoil Law), but it otherwise does not give a priority right to its holder to obtain a PL. The term of an EL may be extended at the request of a License holder for the purposes of completing exploration, or in order to complete restoration or conservation activities, provided that there are no violations of license terms (Art.10 of the Subsoil Law).

- Production License (PL) – is awarded by tender or auction conducted by Rosnedra. PL gives the holder an exclusive right to explore and produce minerals from the license area. PLs are granted for a period of up to 25 years, with the term dependent upon the outcome of a feasibility study. . The term of a PL may be extended at the request of the PL holder where reserves remain or in order to complete restoration or conservation activities, provided that the PL holder complies with the terms and conditions of the license and the relevant regulations. A PL can be granted to develop the whole deposit of discovered minerals or any portion thereof (Art.6.3 of the Licensing Regulation).

- Combined Exploration and Production License (Combined License) – is granted by Rosnedra (by tender or auction) for a maximum term of 25 years. A Combined License gives the holder a right to explore, assess and produce minerals from the license area.

Subsoil areas containing inter alia deposits of uranium, diamonds, nickel, cobalt, platinum group metals or rare earth minerals are included in a category of deposits deemed to have federal importance (Deposits of Federal Importance) (Art. 2.1 of the Subsoil Law). As well, deposits of at least 50 tons of gold or 500 thousand tons of copper are considered Deposits of Federal Importance. The following two types of Subsoil Licenses may be issued for Deposits of Federal Importance: (advanced exploration and) production licenses or Combined Licenses (geological study, advanced exploration and production). Any activities of foreign investors associated with Deposits of Federal Importance will be subject to the Strategic Investments Law and the Foreign Investments Law.

Under certain circumstances, Subsoil Licenses may be transferred without a tender or an auction: i.e., reorganization of a license holder or establishment of its new subsidiary (Art.17.1 of the Subsoil Law). Subsoil Licenses pertaining to Deposits of Federal Importance may not be transferred to a company that has foreign investors who hold, directly or indirectly, more than 25% of the voting rights or who represent 25% or more of the directors, except where approved by a decision by the Government of the Russian Federation (Art.17.1 of the Subsoil Law; Art. 5 of the Foreign Investments Law). In addition to these "control" restrictions for foreign investors, prior approval of the Russian Government is required to allow a public foreign investor (a foreign state and/or entity under foreign states’ control) to acquire, directly or indirectly, more than 5% of the voting shares of a subsoil strategic entity (Art. 2 of the Strategic Investments Law). Art. 20 of the Subsoil Law provides extensive provisions for license termination including: expiration of a Subsoil License term, a decision of a License holder to discontinue the subsoil use upon occurrence of an event envisaged by the licensing agreement, failure of licensee to commence operations within a specified period, or a violation of the essential Subsoil License terms.

In addition to Subsoil Licenses, the Subsoil Law recognizes a separate procedure for obtaining a right to develop a deposit of commonly occurring mineral resources (e.g., aggregate, bitumen, loam and sand) (Commonly Occurring Minerals). Such a right is granted by a decision of regional and / or municipal authorities depending on the specific requirements set by regional legislation. A list of Commonly Occurring Minerals is adopted by the regional legislation. Subsoil License holders that have obtained a Subsoil License for exploration and development of mineral resources (other than Commonly Occurring Minerals) may extract Commonly Occurring Minerals, within the limits of their mining allotments, for their internal needs without having to obtain a separate license for Commonly Occurring Mineral resources (Art.19.1 of the Subsoil Law; Art. 40 of the Land Code). Mining of precious metals and stones is subject to the above licensing procedures envisaged by the Subsoil Law. Management bodies of entities mining diamonds in Russia must be controlled by (i.e., have a majority of the voting rights held by) the Russian Federation, constituent entities of the Russian Federation or organizations established without participation (direct or indirect) of foreign investors (Art.4, para.2 of the Precious Metals Law). Precious metals must be delivered to a refinery included in the official list of companies authorized by the Russian Federation. Violation of the above rules may entail imposition of criminal, administrative and civil liability (Art.30 of the Precious Metals Law). The import and export of precious metals and raw goods may only be made on the basis of export licenses issued by the Ministry of Industry and Trade, unless export is being made to a country in the Customs Union (Russia, Kazakhstan and Belarus).

The export of geological information from Russia in any form is subject to licensing (this applies to all commercial entities operating in Russia regardless of their ownership or place of incorporation). (Decree No.540 of the Government of the Russian Federation, dated August 3, 1992). Foreign entities and citizens are not limited in their rights to use such information, provided they have received such information in compliance with Russian laws. Geological information includes “information on the geological structure of subsoil, mineral resources located in subsoil, terms of their development and other qualities and characteristics of subsoil, contained in geological reports, maps and other materials” (Art.27 of the Subsoil Law).

DEVELOPMENT CONSIDERATIONS

Certain environmental, safety and production commitments are usually imposed on Subsoil License holders: to make certain social commitments, to provide support to local communities, to pay compensation to local indigenous groups in the relevant area, to keep environmental contamination within specified limits (Art. 22 of the Subsoil Law; Art.16 Subsoil Regulation). Upon expiration of a Subsoil License, the license holder must return the land to a condition adequate for future use.